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“We’re Going to Kill the Dollar”

Tuesday, January 22, 2013 22:39
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The Fed’s Plan B

By Mike Whitney

January 22, 2013 “Information Clearing House” - “How do you solve a problem when you’re running a 10% fiscal budget deficit? You are not going to get growth without private sector credit demand. The government’s idea right now is that we’re going to export our way out of this, and when I asked a senior member of the Obama administration last week how are we going to grow exports if we will not allow nominal wage deflation? He said, “We’re going to kill the dollar.” Kyle Bass interview.

Last week, amid growing rumors of a global currency war, the Fed’s balance sheet broke the $3 trillion-mark for the first time in history. According to blogger Sober Look: “For the first time since this program was launched (QE) it is starting to have a material impact on bank reserves … which spiked last week. 2013 will look quite different from last year. The monetary base will be expanded dramatically as long as the current securities purchases program is in place. ‘Money printing” is in now full swing.’” (“Fed’s balance sheet grows above $3 trillion, finally impacting the monetary base”, Sober Look)

Take a minute and consider the implications of the Fed’s money printing operations in relation to the above quote by market analyst Kyle Bass. Can you see what’s happening?

The Fed is acting exactly as one would expect it to act given it’s stated intention to increase inflation (currency debasement) while intensifying the class war at the same time.

How is the Fed waging class war, you ask?

Fed chairman Bernanke has been a big supporter of deficit reduction, which is code for slashing public spending. The recent “fiscal cliff” settlement raises taxes immediately on working people by ending the payroll tax holiday. As Bloomberg notes: “Everybody took a two percentage-point pay cut.” This is bound to impact consumer spending and confidence which dropped sharply last week. Here’s more from Bloomberg:

“Payroll taxes went up. As part of its budget agreement on Jan. 1, Congress agreed to let the tax, used to pay for Social Security benefits, return to its 2010 level of 6.2 percent from 4.2 percent. That reduces the paycheck by about $83 a month for someone who earns $50,000.” (Bloomberg)

So all the worker bees (you and me) have less money to spend, which means that there’s going to be less activity, higher unemployment and slower growth. This is what all the liberal economists have been warning about for over 3 years, that is, if the government withdraws its fiscal support for the economy by reducing the budget deficits too soon, the economy will slip back into recession.

So what is the Fed doing to counter this slide and to create the illusion that nutcases who preached “austerity is good” were right?

Well, the Fed is buying mortgage-backed securities, right? So the Fed is actually dabbling in fiscal policy, assuming a role that is supposed to be played by the Congress. Now, I realise that the buying of MBS doesn’t precisely fit the definition of fiscal policy because the Fed doesn’t collect taxes and redistribute the revenue. But it sure doesn’t fit the description of monetary policy either, now does it? The Fed is not setting rates to control the flow of credit into the system. No, the Fed is buying stuff; financial assets that provide credit to loan applicants who are purchasing hard assets. That ain’t monetary policy, my friend. It is fiscal policy writ large.

The Fed is currently purchasing $45 bil per month in US Treasuries to push down long-term interest rates in order to help the banks sell more mortgages so they can reduce their stockpile of distressed homes.

And, the Fed is buying $40 billion of MBS per month to help the banks clear their books of left-over MBS and to provide funding for the banks to generate new mortgages.

Also, 95% of all new mortgages are financed through Fannie and Freddie. In other words, the government is providing all the money and taking all the risk, while all the profits go to Wall Street.

Let’s review:

Fannie and Freddie’s policy is designed to help the banks
The Fed’s MBS purchasing program is designed to help the banks.
The Fed’s QE (UST purchases) policy is designed to help the banks.

Do you see a pattern here? It’s all for the banks, which is why Marx was correct when he referred to “political economy” because the economy doesn’t operate according to free market principals. It is organized in a way that best achieves the objectives of the constituency that controls the levers of political power.

Now guess which constituency controls those levels of political power presently?

If you guessed “the Wall Street banks”, give yourself a pat on the back.

So, what effect is this going to have on policy?

Well, to some extent we already know the answer to that question because–as we pointed out earlier–the policy is shaped to benefit the banks. Even so, an analogy may be helpful to better grasp what’s going on.

Let’s say you have $5 million that you want to put into manufacturing. In fact, you have decided you want to open your own factory and produce widgets of one kind or another to sell to the public. Eventually, you whittle your options down to two choices; you will either produce a modern line of electric cars to reduce emissions and pave the way for new technologies or you will make hula hoops. So, what’s it going to be?

Fortunately, for you, the Fed announces a new program that will provide $45 billion per month “indefinitely” to manufacturers who provide low interest loans to people who want to buy hula hoops.

“Yipee”, you say. “I will abandon my plan to save the planet from poisonous greenhouse gases and make my fortune selling hula hoop bonds to the Fed instead.”

Isn’t this what’s happening? None of this has anything to do with lowering unemployment, strengthening the recovery or increasing growth. It’s all just a way of funneling money to powerful constituents. And one thing is certain, that if the Fed creates the demand for a product (like MBS), then someone is going to fill that demand whether it helps the broader economy or not.

But if the Fed can buy mortgage bonds, then why can’t they buy infrastructure bonds? What’s the difference?

The difference is that mortgage bonds boost profits for bankers, whereas infrastructure bonds merely provide jobs for people who need them. In other words, the difference is not between fiscal and monetary, but between the “haves” and the “have nots”, which is the same as saying that the Fed’s policies are based on class interests. And, that brings back to our original comment by Kyle Bass, who wonders how the US can grow its way out of its present predicament (big budget deficits and weak exports) without more “private sector credit demand”?

Great question. But you can see that Fed chairman Bernanke has already tipped his hand. The Fed is going to keep waving that “$45 billion per month” carrot in front of the banks until they rev-up the credit flywheel and create a new regime of toxic mortgages. (The new Consumer Financial Protection Bureau’s rule on “Qualified Mortgage”, which requires neither a down payment nor credit scores, makes this prospect even more likely.) Bernanke is playing the role that the repo market played before the Crash of ’08, that is, the Fed is promising to buy all the complex bonds (MBS) the banks produce off balance sheet to keep money flowing to the banks. It’s just like the free market, except there’s nothing free about it. It’s all fake and Bernanke doesn’t care if you know it.

$45 billion per month isn’t chump change. It’s enough to inflate housing prices, to employ more out-of-work construction workers, to grow the economy, and to save bank balance sheets that are deep in the red. At the same time, the Fed’s ballooning balance sheet will put downward pressure on the dollar which will increase exports while lowering real-inflation adjusted wages. Like the man said, “We’re going to kill the dollar.”

This is the Fed’s plan: Bail out the banks, transfer the banks bad bets onto its own balance sheet, hammer the greenback, slash wages (via inflation), boost exports, and pump as much money as possible into the unproductive, overbuilt black hole we call the US housing market.

Of course, President Obama could avoid all this nonsense and just launch a government-funded jobs program that would snap the economy out of its coma, increase demand, and turbo-charge GDP, but that would be way too easy. And probably bad for profits, too.

Mike Whitney lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at

This article was originally posted at Counterpunch

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Total 10 comments
  • Anonymous

    the people need to wake up and not get sucked into mortgages. If you cannot pay for it, don’t buy it.

  • pastorpatriot

    Buy and sell property using a standard land contract. The seller receives interest and spreads capital gains over several years and the buyer can work directly with the person that holds the mortgage. Banks are useless eaters in our society. Quit using them. Selling a car? Use a contract and put your name as lienholder on the title. Make saure you are protected through insurance.

  • Anonymous

    It’s the American people who are “killing the dollar” because they keep sending politicians to Washington DC who refuse to cut the spending.

    • Realist

      Very true. The elite filth believes we’re the useless eaters, when in truth it is the aristocrats and banking families, as well as the politicians, who are the true useless eaters. But they will get what’s coming to them, have no doubt about that.

  • Chuck Wheeler

    Im an American — From where I stand — Im embarrassed the way our goverment has ran the country into the ground , always sticking our noses where it dont belong, just remember when you all come to kick ass – its the goverment who’s doing the dirty work — not the people of the U.S. its bad when 90% population of the U.S. disagrees on the action of our goverment.. Its all about money & power.. Live & let live ,everyone help each other & do what you can to live a happy life.. No one in china pissed in my cereal bowl :cry:

  • Anonymous

    Keynesian economics and the road to destruction.

  • Anti-Zion

    Yes and they will be telling us that inflation is running at 2% and you won’t hear any traders saying otherwise else they cannot pretend that they have made any profit at all.

    Physical silver is not going up its just that the fiat is going down

  • Anonymous

    Kill the U.S. Dollar you will destroy your Zionist controllers.
    Without money they are nothing but cowards,that will weather it out in their Bunkers ,that you the Taxpayers of America have donated.

  • Anonymous

    Here is a better solution. Remove all the insane psychopaths who are in power (they are a danger to everyone, including themselves), reclaim all the stolen gold, and establish the gold standard.

  • dewey

    End-Time “Egypt”—A Superpower in Decline
    Isaiah’s use of types of ancient world powers that foreshadow
    end-time ones extends to the great superpower Egypt. As with all nations and
    persons who appear in the Book of Isaiah, their true identity appears from
    the way Isaiah characterizes them, not from historical or archaeological
    data, though at times that may be of help. In searching the world today for a
    superpower that matches Isaiah’s description of “Egypt,” the sole candidate
    is America. That connection is further strengthened by the fact that God’s people
    anciently dwelt in Egypt, that Joseph ruled Egypt, and that the birthright
    tribe of Ephraim sprang from Joseph and Asenath, an Egyptian woman.
    Isaiah’s Egypt, however, is a superpower imploding: “The
    ministers of Zoan have been foolish, the officials of Noph deluded; the heads
    of state have led Egypt astray. Jehovah has permeated them with a spirit of
    confusion; they have misled Egypt in all that it does, causing it to stagger
    like a drunkard into his vomit. . . . Manufacturers of combed linen and weavers
    of fine fabrics will be dismayed. The textile workers will know despair, and
    all who work for wages suffer distress. . . . I will stir up the Egyptians
    against the Egyptians; they will fight brother against brother and neighbor
    against neighbor, city against city and state against state” (Isaiah 19:2,
    9–10, 13–14).
    Learn about what Isaiah says will happen to America…

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